At what mortgage rate would you pay it off early?

[grabiner]

Does everyone paying off early not use mortgage interest tax deductions? Or at least take them into account when deciding? That makes a huge difference in my filing each year and not sure theres any advantage to paying it off early.

You have to really delve into the calculus to see if you are getting the advantage you think you are. Chances are you aren't.

Let's take some numbers: say you have a $500k mortgage at 5% rate, and your tax bracket is 24% + 5% (a middle of the road state tax bracket), and your filing status is Married Filing Jointly. Your mortgage interest is $25,000, your SALT deduction is $10,000 so your itemized deductions come to $35,000. But your 2023 standard deduction is $27,700 so really the advantage you get is only on the last $7,300.

However, if you are considering paying the mortgage down. rather than off, then you eliminate deductible interest first. In your example, you would get only a 3.55% return on the first $146K of the paydown (or even more if you also donate to charity), then a 4.75% return beyond that (assuming your state has a lower standard deduction). This makes it more attractive to invest money until you have enough to pay off all or most of the mortgage.

[KlangFool]

You are correct that you can get money out tax free and penalty free prior to 59 1/2, but it seems the IRS considers these pension plans/retirement accounts.

Oldaroo3,

And, how does that really matters if someone can get the money out tax free and penalty free before 59 1/2 years old? To be precise, they are IRAs and 401Ks with specific IRS rules pertaining to them. Labeling them as XYZ or ABC does not change anything.

The problem with labeling them as retirement account give them the false impression that you could not get the money out tax free and penalty free before 59 1/2 years old. Aka, they could only be used for retirement. Tax advantaged account does not carry that implicit assumption.

KlangFool

[pizzy]

IRA are not retirement accounts.

Individual Retirement Arrangements are not retirement accounts.

We are taking the “make up a definition” to a whole new level. This is dangerous.

https://www.irs.gov/taxtopics/tc451

[lakpr]

However, if you are considering paying the mortgage down. rather than off, then you eliminate deductible interest first. In your example, you would get only a 3.55% return on the first $146K of the paydown (or even more if you also donate to charity), then a 4.75% return beyond that (assuming your state has a lower standard deduction). This makes it more attractive to invest money until you have enough to pay off all or most of the mortgage.

Point valid but at 5% rate, there is very little advantage to investing than paying off. Intermediate term and long term treasury notes are yielding 4.6% or less. Short term T bills are yielding 5.25% so investing in such T bills is just 0.25% advantage before tax, or 0.177% after tax, or a grand total of $888 per year on $500k mortgage balance. Next year the short term T bills may not yield 5.25%...

Paying down the mortgage is not noticeably worse in the short term, and definitely better in the longer term ( greater than 1 year )

[KlangFool]

IRA are not retirement accounts.

Individual Retirement Arrangements are not retirement accounts.

We are taking the “make up a definition” to a whole new level. This is dangerous.

https://www.irs.gov/taxtopics/tc451

Please explain how the labeling of IRA as retirement accounts are useful in the personal finance context? Or, the label does not have to be useful at all. It is just whoever choose it to be.

Please note that in this context, tax advantaged accounts refer to HSA, 401K, and IRAs. It is not limited to IRAs and 401K.

KlangFool

[Kendall]

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[Tom_T]

However, if you are considering paying the mortgage down. rather than off, then you eliminate deductible interest first. In your example, you would get only a 3.55% return on the first $146K of the paydown (or even more if you also donate to charity), then a 4.75% return beyond that (assuming your state has a lower standard deduction). This makes it more attractive to invest money until you have enough to pay off all or most of the mortgage.

Point valid but at 5% rate, there is very little advantage to investing than paying off. Intermediate term and long term treasury notes are yielding 4.6% or less. Short term T bills are yielding 5.25% so investing in such T bills is just 0.25% advantage before tax, or 0.177% after tax, or a grand total of $888 per year on $500k mortgage balance. Next year the short term T bills may not yield 5.25%...

Paying down the mortgage is not noticeably worse in the short term, and definitely better in the longer term ( greater than 1 year )

Also keep in mind that, nowadays, far more people use the standard deduction, so deductible interest isn't a thing for them.

I think this becomes an exercise in determing the best use for the lump sum of money that one would use to pay off the loan, and that depends on one's financial circumstances as well as the rates. In my situation (2.1% rate), paying it off early is not an optimal use of my money. In a few years, though, when the balance is down to $25K and it's mostly principal, I may very well throw up my hands and say "time to get rid of it."

[smitcat]

However, if you are considering paying the mortgage down. rather than off, then you eliminate deductible interest first. In your example, you would get only a 3.55% return on the first $146K of the paydown (or even more if you also donate to charity), then a 4.75% return beyond that (assuming your state has a lower standard deduction). This makes it more attractive to invest money until you have enough to pay off all or most of the mortgage.

Point valid but at 5% rate, there is very little advantage to investing than paying off. Intermediate term and long term treasury notes are yielding 4.6% or less. Short term T bills are yielding 5.25% so investing in such T bills is just 0.25% advantage before tax, or 0.177% after tax, or a grand total of $888 per year on $500k mortgage balance. Next year the short term T bills may not yield 5.25%...

Paying down the mortgage is not noticeably worse in the short term, and definitely better in the longer term ( greater than 1 year )

Also keep in mind that, nowadays, far more people use the standard deduction, so deductible interest isn't a thing for them.

I think this becomes an exercise in determing the best use for the lump sum of money that one would use to pay off the loan, and that depends on one's financial circumstances as well as the rates. In my situation (2.1% rate), paying it off early is not an optimal use of my money. In a few years, though, when the balance is down to $25K and it's mostly principal, I may very well throw up my hands and say "time to get rid of it."

And if things do not change, the deductions for a mortgage will become a larger player for many in about 2 years when the tax reform reverts.

[LadyGeek]

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